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Income Convergence and Inflation in Central and Eastern Europe

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  • Karsten Staehr

Abstract

This study investigates the process of price convergence in the ten new EU countries of Central and Eastern Europe. The analyses are based on panel data from 1995 to 2008 of the common currency price relative to the EU15 average. The lagged income level exhibits little explanatory power toward relative inflation, but the lagged price level has some explanatory power. In the long term, the relative income and price levels are closely correlated, implying concurrent real and nominal convergence. Deviations from the long-term relation between income and price levels are gradually decreased by changes in relative inflation and gross domestic product growth, but the process of convergence appears to be rather slow. In the short term, the capital inflows associated with current account deficits put substantial upward pressure on relative price inflation, but the Balassa-Samuelson effect appears to be subdued.

Suggested Citation

  • Karsten Staehr, 2010. "Income Convergence and Inflation in Central and Eastern Europe," Eastern European Economics, Taylor & Francis Journals, vol. 48(5), pages 38-62, September.
    • Handle: RePEc:mes:eaeuec:v:48:y:2010:i:5:p:38-62
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    Cited by:

    1. Jaanika Meriküll & Tairi Rõõm, 2015. "One Currency, One Price? Euro Changeover-Related Inflation in Estonia," Journal of Common Market Studies, Wiley Blackwell, vol. 53(4), pages 822-839, July.
    2. Aleksandra Halka & Grzegorz Szafranski, 2018. "What Common Factors are Driving Inflation in CEE Countries?," Prague Economic Papers, Prague University of Economics and Business, vol. 2018(2), pages 131-148.
    3. Brož, Václav & Kočenda, Evžen, 2018. "Dynamics and factors of inflation convergence in the European union," Journal of International Money and Finance, Elsevier, vol. 86(C), pages 93-111.
    4. Juan Carlos Cuestas & Luis A. Gil-Alana & Karl Taylor, 2012. "Inflation Convergence in Central and Eastern Europe with a View to Adopting the Euro," Working Papers 2012005, The University of Sheffield, Department of Economics.
    5. Moritz Degler & Karsten Staehr, 2021. "Price and income convergence and the dynamic Penn effect in Central and Eastern Europe," Economic Change and Restructuring, Springer, vol. 54(3), pages 621-635, August.
    6. Juan Carlos Cuestas & Luis A. Gil-Alana & Karl Taylor, 2016. "Inflation convergence in Central and Eastern Europe vs. the Eurozone: Non-linearities and long memory," Scottish Journal of Political Economy, Scottish Economic Society, vol. 63(5), pages 519-538, November.

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